Venture Capital Pioneer Illuminates the Silicon Valley Ecosystem

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Pitch Johnson, lecturer in Management at Stanford GSB

Perched on Franklin “Pitch” Johnson’s desk is a four-inch steel ingot, a silent reminder of his first civilian job out of business school: a melter foreman in charge of several open-hearth furnaces in a steel mill in East Chicago, Ind. In 1962 Johnson left behind the grit and swelter of the mill to move back home to Palo Alto, Calif., and start an investment firm. Unaware of it at the time, Johnson was about to become one of the founding fathers of the world’s most efficient startup machine: Silicon Valley.

“A burst of entrepreneurial activity took place that dwarfed any other period in the history of the United States,” Johnson wrote in a paper on entrepreneurship in 1998. “What occurred in the next few decades was nothing less than an entrepreneurial revolution that shook the country and the world.”

Since 1960 Silicon Valley has spawned 32,000 high-tech companies. Cities the world over have tried to replicate the magic of the valley but none have yet been able to create an environment that fosters entrepreneurship, disruption, and invention on the same scale.

Johnson knows something about winning, not only from his career but also from his childhood. His father, Franklin Pitcher Johnson, was an Olympic hurdler who went on to become the track coach at Stanford. Johnson Jr., also known as “Pitch,” showed promise in track and field, which earned him a full scholarship to Stanford. When the atom bomb went off in 1945, however, Johnson’s interests turned to physics, and he pursued a bachelor’s degree in mechanical engineering. He earned a degree from Harvard Business School and served in the Air Force before going to work at the steel mill.

He returned to California, and in 1962, Johnson partnered with Bill Draper (the father of Timothy Draper, a well-known venture capitalist and cofounder of Draper, Fisher, Jurvetson) and founded Draper and Johnson Investment Company, one of the very first venture capital firms. Together, they visited university labs and knocked on doors of newly formed companies to unearth promising new inventions in which they could invest. Three years later Johnson launched his own firm, Asset Management Company, which has invested in more than 200 tech startups, including Amgen, Biogen, and Tandem. Johnson also developed and taught a course on venture capital at Stanford Graduate School of Business for 12 years. The class is still being taught today.

Johnson recently discussed his insights into why and how Silicon Valley continues to thrive.

You’ve been part of helping other regions in the world to become centers of entrepreneurial activity. While many of these places have gotten better at this, Silicon Valley continues to dominate. Why?

There are many conditions that allow Silicon Valley to thrive. First, in the U.S., we have had relatively moderate tax rates for capital gains. In the Bay Area we have three great research universities: UCSF [University of California, San Francisco]; Cal [University of California, Berkeley], and Stanford University. Those schools produce students and attract professors who know a lot about technology, and they produce the knowledge and research that leads to the creation of companies.

People forget San Francisco and Silicon Valley have their roots in pioneering. Failure is not unthinkable here. You can try again.

In some places in Europe, however, it is a disgrace to fail and you have to retreat from business life. Most Silicon Valley business inhabitants understand that great technology means very little unless it can serve or create a marketplace. I go to Russia, and it’s pulling teeth to get them to talk about anything but the technology itself. Once entrepreneurs come up with a scheme to move their technology ideas into the market, they need money. Here, we have an abundance of venture capital. In many places in the world, you need a rich friend or an uncle.

You have invested in more than 200 companies. Of which investment are you most proud? What made it so successful?

Amgen. It got to be the biggest, and I had a major role along with Bill Bowes. Amgen serves the medical community with really important products. We make it possible for people to not get anemic when they have kidney dialysis. We picked a superb leader, George Rathmann, and created a great company that does a lot of good for patients. The principal purpose was always serving patients.

What was your worst investment, and what made it fail?

Any investment, when you get zero money back, is the worst. I’ve done that several times. When I have failed, it’s been because in my due diligence I didn’t see the mode of failure. Often it was the inability to get along with other people, or they couldn’t build a business because no one wanted to do business with them.

What do you look for in a venture investment?

This is a big argument between me and my good friend Don Valentine, a founding partner of Sequoia Capital. The first thing you look for in an entrepreneur is a sense of integrity, honesty, openness, and decency. Once you think you have found a decent person, the second thing is: Do they have a clear vision of the marketplace they want to serve? Don believes that you need decent people, but the marketplace comes first, because you can’t change that, but you can change the people. We both ask: Do they have a differentiated ability? Is their product workable? Do they have enough of a different idea that they will be free of certain kinds of competition? Will the business operate with good margins?

What are the most important characteristics of winning entrepreneurs?

They must have a strong desire to compete and win, an intuitive understanding of marketplaces and how to serve them, and a deep understanding of technology and how it can be used to serve marketplaces. Those three things are fundamental. A fourth is high integrity and decent behavior. If you don’t have that you will have a short run at success but you won’t make it long term. Also, I have never met a successful entrepreneur who didn’t have zeal.

What mistakes do you see entrepreneurs make most often?

Running out of money. Often they plan to grow faster than reality will permit. They are too optimistic.

What mistakes do you see venture capitalists make most often?

Very large venture firms have trouble doing small deals but the companies that end up being terrific investments often start as very small deals. Another mistake is getting impatient. We used to know it took five to seven years to build a company from scratch and take it public. Now, so many companies do it in their first year or two of life.

What should entrepreneurs look for in a venture capitalist?

They should look for someone who can provide active help. It could mean contacts to customers or making judgments about strategy, tactics, and business plans. I’ve even worked booths at trade shows to lend a hand. They need someone they can feel comfortable telling the highlights and the lowlights. They should ask themselves: Does this venture capitalist want to win as badly as I do?

What is the best business advice you have ever received?

When we were first starting our firm, a lawyer, Ed Huddleson, said to Bill and me: “We can write all the investment agreements you want but if you have to bring them out of the drawer, something has gone wrong. Invest in people you can believe in, and you will never need to take the papers out of the drawer.”

What do you think is the next great wave of technical development?

A continuation of the move into handheld devices and the use of those devices for communications as well as complex functions in the Cloud; widespread use of individual human genomes to design drugs and treatments; the use of human stem cells and cells derived from stem cells to treat a large number of conditions and ailments.

Pitch Johnson is a Lecturer in Management at Stanford GSB. He developed and taught a course in entrepreneurship and venture capital at Stanford for 12 years from 1979-1990. It was the first venture capital course taught in a graduate school of business.